There’s an abundance of information available on and around ESG factors and the increasing responsibility of Boards to consider each element as part of their decision-making and leadership roles.
However ESG remains a complex issue directors seem to be unsure of how to monitor and implement efficiently and effectively.
Governance by Design’s managing director Sonya Beyers recently sat as a panelist on an AICD director’s briefing on sustainability, and shares some thoughts discussed on ESG and how directors should be approaching it.
ESG insights for Boards and directors: how to tackle a complex challenge. Click To Tweet
It’s questionable if directors are fully across the need to understand ESG and their Boards’ need to regard it as a core and fundamental part of their duties.
Directors can no longer afford, if they ever did, to view governance through solely a compliance lens.
Traditional leadership styles with a financial returns focus are long out-dated, with leaders of today needing to incorporate a values-based approach to the decision-making table and consider the social and environmental impact of their decisions as well as financial issues.
ESG also requires directors to set aside the idea of waiting for direction and regulation. High-performance directors and Boards will instead take a front-foot approach to ESG and lead the discussion on how their organisation is meeting these expectations.
Those who wait for an eventual regulation of ESG are not only missing an opportunity to rise as good corporate citizens and reap the reputational and investment potential from that, they risk becoming redundant in a world that has moved on without them.
As Virgin Australia and IAG chair Elizabeth Bryan has said, it’s not for directors to debate the realities or otherwise of climate change, but to realise and accept that the issue is significant to the community, and business needs to be clear on their actions and consequences on the matter.
This applies as much to the social matters as it does to environmental.
The problem for directors is whilst the concept and expectations around good governance are widely known and most directors have a relatively clear understanding of them, tying environmental sustainability and social responsibility within the governance framework presents a complexity of unknowns, risks and sometimes opposing requirements. For example, it’s difficult for directors to know where to start as there is a lack of consistency in reporting on the issue.
What we do know is that 80 per cent of company balance sheets worldwide comprise intangible assets. So, the potential for reputational risk is significant and exposure to this risk through ESG is likely to increase moving ahead as the environment and social values continue to draw widespread public and political attention.
Environmental sustainability is trending and now that there is regulation (APRA) policy and other regulators stating that fiduciary duties encompass it, this appears to be the priority for Boards. However, sometimes this impedes the bigger question of what other ESG components are important within an organisation’s business.
Our efforts in addressing the social aspect of ESG is lagging behind. We rely on our people to deliver the environmental sustainable outcomes and the governance framework, yet the social aspects are being considered last.
The current focus on organisational culture is shining some light on the social aspect of business at least.
The Australian Council of Superannuation Investors has proposed that all listed entities should be required to regularly conduct culture assessments and disclose any action taken to provide a level of transparency for investors and to also encourage a level of reporting on corporate culture similar to other areas of ESG.
Indeed, public sentiment is also turning to place greater social responsibility on business, with the 2019 Eldemen Trust Barometer finding 71 per cent of employees believe it’s critically important for a CEO to respond to challenging times and more than three-quarters of the general population also say they want CEOs to take the lead on change instead of waiting for government to impose it.
ESG skills and information – what questions to ask and where to find the answers
It’s questionable if the skills required to tackle ESG have as yet made it to a significant number of boardrooms.
Board compositions still tend to lean towards being heavy on the legal and financial expertise, and short on expertise from areas helpful to ESG, including environmental, marketing and public relations professionals.
If Boards don’t yet have the wisdom, skills and capacity at the board table, then the next question to ask is what skills are we as directors looking to from our management?
If we don’t have management who have these skills, what do we need to do as a Board collectively to obtain the necessary information?
The nuance in governance still applies to ESG matters: Boards rely primarily on information provided to make decisions, so it’s critical the information being provided is questioned and challenged to ensure its relevance.
As a matter of urgency, directors need to consider if their Board has had a discussion to set an aligned appetite around ESG.
As part of that discussion, directors need to select what is appropriate for their business and ask what they will report against. Are you reporting against measurables that are difficult to obtain, rather than those that you know you can satisfy?
Once you have established a shared appetite, does that mean you are limited in your thinking as a director? Do you consider that you can go outside the lens of that shared by your Board?
The composition of Boards is key to tackling the challenges of ESG. If we don’t have the wisdom, expertise or skill at our board table, then we must look to management to inform decisions. If a Board can’t rely on management, then what experts are needed to inform the process?
A Board I sit on, started the journey to settle a unified Board position 18 months ago. We are just this month about to adopt four sustainable development goals we think are relevant to our business. We have used external providers to assist us to get there.
This has been an insightful journey, along with my attendance at the Harvard University Trustee Leadership Forum and the INSEAD International Directors Programme course I am participating in, which has highlighted that as directors we must constantly learn and remain in touch with changes that impact our organisation’s future.
Share this Post
Board composition reviews
GBD can assist your board with a skills matrix review, either separately or as part of a broader review of Board performance.